Risk, football and picking winners

Initially Goldman picked out Brazil, edging out Germany, to claim the ultimate prize. The US group marshalled an impressive amount of data, deploying machine learning to run over one million simulations while assessing each country’s players, form and history. 

"Picking a World Cup winner is notoriously fraught with difficulty, even for artificial intelligence.” 

With the early demise of Germany, the team ran the numbers once more, giving the Brazilians the edge over Croatia. In one of the most unpredictable world cups I’ve seen this prediction didn’t pan out either.

Nevertheless, it’s been a fascinating exercise and shows the limits of quantitative analysis when it comes to sport. It also made me reflect on aspects of my own role as I try and predict and manage risks across several countries.

Picking a winner

Picking a World Cup winner is notoriously fraught with difficulty, even for artificial intelligence.

As a senior risk representative for ANZ it’s my role to assess the sovereign and country risk the bank takes directly and indirectly in its operations across 33 countries. Like Goldman’s football analysis (although clearly a tad more serious) ANZ also looks over a range of factors impacting the performance and conditions of different countries.

These include macro trends such as political, financial and economic factors. In addition, the bank monitors financial markets, capital flows and liquidity. All of this information then helps drive alignment between business and risk strategy and ultimately assist organisations in working out strategies for minimising the risk of operating in different countries.

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Like any team at the World Cup there can be a range of factors affecting the conditions in any given country. For a football team, it could be an injury to a star player, a breakdown of relationships between players and coach, fatigue or poor preparation.

When it comes to the risks of doing business in a country these can also be driven by a myriad of factors from severe economic stress and long-term economic stagnation through the systemic banking crises and the materialisation of political risk.

These various factors are interlinked. Each one alone can pose varying degrees of pressure on transactions and relationships. Understanding their development and trajectory, as well as the impact they will have on customers and the operating environment is key to setting risk appetite.

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These insights also help us structure transactions in a way that supports customers, for example structuring facilities offshore, or adding additional insurance.

This holistic approach is something which McKinsey have also advocated when it comes to managing one of the most notable risks associated with operating in a country – currency risk. As it noted, while companies are susceptible to a range of currency risks, not all of them are one which companies can or should try to manage.

They recommend a focus on the particular currency risks that could lead to financial disruption or distress.

Meine lieben

It’s rare for Germany not to figure prominently in the football world cup, but predicting the business conditions across countries can be more difficult.

When assessing this risk, an institution needs to understand the extent to which a currency can protect the openness of its capital markets for example through exchange rate flexibility and hard-currency reserve buffers.

How can you tell if this risk exists? Well just as a coach might run the rule over his players’ fitness, ability to play in different positions, resilience to pressure and tournament experience, ANZ also assesses a range of indicators.

These include the overall credit quality of the government the breadth of fiscal or foreign exchange buffers, reliance on foreign capital to fund the economy, the overall development and health of the financial system.

Turmoil on the Korean peninsula is just one example of the potential for political stability to raise country or sovereign risk

In the current political climate however, some of these factors are harder to quantify and predict but nevertheless are equally important: political stability, quality of policy decisions and political willingness to use capital controls.

While the risk of political or financial instability can be more difficult to predict, as Management Consultant Oliver Wyman has noted it’s important to ensure that organisations work to develop solid risk management frameworks and the associated skills to help them have a clearer internal view of their material foreign exposures.

This is why at ANZ there’s a key focus on infrastructure, policy, process improvement and risk culture, as well as training and development. Like any good manager, it’s only when the team has the right skills and structure that they can best perform.

For the record - as someone who appreciates unpredictability- I’m backing France to pick up their second World Cup. But as we’ve seen, there may be more surprises in store.

Didier Magloire is ANZ’s Global Head of Financial Institutions, Sovereign and Country Risk Management